calculation of index in finance

8/12/2019 Calculation of Index in Finance

1/6

Page 1of 6

Chapter 1

Market index

Simply index refers to an indicator which is used to show the change in variables

between two distinct time periods. Index may be price index, inflation index etc. But nowwe are being concerning about market index. Market index as an indicator is used to

show the moment of market or security market between two periods of tells about the

bullish or bearish trend of market i.e. whether the market is going up or down.

Objectives of calculating index

For the assessment or evaluation of investment as well as market. To make appropriate decision. For planning and forecasting. To analyze the impact of economic and other indicator. To make research.

Main concerns of index computation

Sample size Representatives Weighting (price weighting, value weighting, equally weighting) Expression unit

Price weighted index

Under this index the average price of security, which are included in sample size is

taken to show the change in security market. The higher fluctuation in price range of

individual stock will mislead the index.

Where,

Price index (PI) =

Example:


2/6

Page 2of 6

Day 0 Day 1 Day 2 Day 3

Stock No Price(Rs) No Price(Rs) No Price(Rs) No Price(Rs)

A 10 300 10 330 20 170 20 110

B 20 200 20 200 20 240 22 210

C 30 100 30 95 30 105 30 115

Other information

At the end of day 1 company A declares 2 for 1 stock. At the end of day 2 company B declares 10% stock dividend.

Required:

Calculate the PI for day 0.

Index for day 0 (I0) =

=

= PWI for day 1.


=

=

Here index has increased to 211.67 from 200.

Change in index =

=

=

=

c. By considering the stock split of day 1 revised the divisor and find the index for

day 2.

Price index for day one (I1) =

The new divisor used until the next change.


=

.. Index has increased to 231.98 from 211.67

.. Return on index = % change =

=

d. Find the price index for day 3.

By considering the effect of stock dividend.


3/6

Page 3of 6


New index for day 3 (I3) =

.. Index has increased to 242.24 form 231.98.


=

Summary

Price 600 635 515 515

Divisor 3 3 2.22 2.126

Index 200 211.67 231.98 242.24

Return - 5.93% 9.596% 4.423%

Stock split

I1=

.22

Stock dividend

I2=

231.98 =

New divisor = 2.126

Value weighted index (VWI)

Under this index the overall value of securities (which are included in

sample size) between two distinct period is taken to show the change in market.

Since it uses the overall capitalization of market it is also known as capitalization

method. NEPSE and S & P 500 index are calculated on the value weighted index.Where,

Value weighted index (It) =


4/6

Page 4of 6

Where,

MV = Market value

N = Number

P = Pricet = t-period

b = base period

I = index

For example

Day 0 Day 1 Day 2 Day 3

Stock No Price(Rs) No Price(Rs) No Price(Rs) No Price(Rs)

A 10 300 10 330 20 170 20 110

B 20 200 20 200 20 240 22 210C 30 100 30 95 30 105 30 115

Other information

At the end of day 1 company A declares 2 for 1 stock. At the end of day 2 company B declares 10% stock dividend. At the end of day 3 company C list additional 10 shares.

SUMMARY TABLE

MVt= N*P MVo = 10,000 MV1 = 10,350 MV2 = 11,350 MV3= 11,870

Index

100 103.5 113.5 118.70

Return,

- 3.5% 9.66% 4.58%

Value weighted index for tperiod (It) =

=


5/6

Page 5of 6

Where,

MVMarket value

PPrice

NNumber

tt- periodbbase period

Iindex

a. Value weighted index for day 0 (I0) = 100 (assume)b. Value weighted index for day 1 (I1) =

.. Index has increased to 103.5 for 100.

.. Return in index =

c. value weighted index for day 2

.. Index has increased to 118.70 from 113.5

.. Return on index

By considering the additional listing of company C, raise the base value for index

computation.

OR

Form day 4 onward,

The revised base value is used

i.e.


6/6

Page 6of 6

Equally weighted index

Under this method the relative change in price of securities (which are included

in sample size) is taken to show the change in market between two distinct periods

by assuming equal rupee investment is made in each assets.

For example:Consider the following price

Stock No Po N1 P1 N2 P2

A10 300 10 330 20 170

B20 200 20 210 20 240

C30 100 30 95 30 105

Additional information:

At the end of day 1 there is share split of 2 for 1 on company AEqually weighted index for t-period (It)=

=

Equally weighted index for day 0 (I0) = 100 (assume)

Equally weighted index for day 1 (I1) =

= 103.33

.. Index has increased from 100 to 103.33


=

Equally weighted index for day 2 (I2) =

=

=

= 112.78

calculation of index in finance

Documents